Explain the role of primary dealers in the money market.

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william1941 | College Teacher | (Level 3) Valedictorian

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Primary dealers are large commercial banks which operate under the supervision of the U.S. Federal bank or broker-dealers registered with the SEC. They are required to have a capital base in accord with Tier 1 and Tier 2 capitalization, which covers both equity capitalization and core capitalization. Capitalization is a significant qualification for being a primary dealer because PDs keep the Federal Reserve trading desk operations running efficiently.

Primary dealers buy securities from those issuing them and then sell them to smaller investors. The system of dealing through primary dealers gives the sellers an assurance that all the securities on issue will be sold. But at the same time it gives the primary dealers a lot of power and the ability to manipulate the process of buying and selling securities.

For this reason strict laws have been enacted to prevent any collusion between dealers and to ensure that they cannot take undue advantage of their monetary power.

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